NRB Eases Project Financing Rules but Tightens Bank Accountability

Kathmandu — Nepal Rastra Bank has introduced a new regulatory arrangement that seeks to ease financing pressure on long-term projects while making banks and financial institutions more accountable for credit risk and financial crime control.

Through an amendment to the Unified Directive 2082, the central bank has allowed interest capitalisation for long-term projects that require at least two years to begin commercial operation or generate cash flow.

Under the revised rule, interest accrued during the construction or moratorium period can be added to the loan amount until the project starts earning income. This means borrowers will not have to immediately pay interest while the project is still under construction and has not begun generating cash.

The provision is expected to benefit capital-intensive projects such as hydropower, infrastructure, tourism, manufacturing, hospitals, hotels and other long-term investment ventures. Such projects usually require large loans and take several years before they begin producing revenue.

The central bank has also defined long-term projects more clearly. Projects that take at least two years to begin commercial production or generate cash flow will fall under this category.

However, the facility will not be automatic. Banks must mention the interest capitalisation arrangement in the loan agreement. They must also prepare a clear internal procedure before applying the facility.

The procedure must include the eligible sectors, realistic cash-flow analysis, repayment terms for capitalised interest, proposed capital plan and debt-equity structure. This means banks cannot provide the facility casually or without proper project assessment.

The decision to capitalise interest must also be approved by the board of directors of the concerned bank or financial institution. This requirement is important because it brings the decision to the highest institutional level and reduces the chance of weak credit judgment at the operational level.

Although the policy provides relief to borrowers, it also imposes stricter risk controls on banks. If the originally fixed grace period is extended and interest is again capitalised, the loan will be treated as a restructured loan.

In such cases, banks must maintain at least 25 percent loan loss provisioning on the total loan amount. This is a strong regulatory signal that repeated extension of grace periods will now carry a higher cost for banks.

The interpretation is clear. NRB is giving flexibility to genuine long-term projects, but it is also trying to prevent banks from hiding weak loans through repeated grace-period extensions.

In the past, banks could sometimes extend project deadlines and keep loans looking less risky. The new rule makes that practice more difficult by linking such extensions with higher provisioning requirements.

The central bank has also required banks to record capitalised interest separately under the heading “Interest Capitalized Term Loan.” This accounting requirement will help identify how much of a project’s total debt comes from original borrowing and how much comes from unpaid interest added later.

This is important for transparency. If capitalised interest is mixed with the original loan without clear accounting, the real debt burden of a project may become unclear. A separate ICTL account allows banks, auditors and regulators to monitor the actual exposure more effectively.

Hydropower projects have received some special flexibility. If a hydropower project has completed construction and started production but cannot operate at full capacity because transmission lines or evacuation infrastructure are not ready, interest capitalisation will not be treated as restructuring.

This provision is significant for Nepal’s hydropower sector. Many hydropower projects face repayment pressure not because the project itself has failed, but because transmission infrastructure is delayed. In such cases, revenue may remain lower than expected even after generation begins.

By not treating such cases as restructuring, NRB has tried to separate genuine infrastructure-related delays from weak project performance. This may provide relief to hydropower developers whose cash flow is affected by factors outside their direct control.

The central bank has also provided conditional relief for projects damaged by natural disasters, landslides, floods, earthquakes, riots or other circumstances beyond the borrower’s control.

If such events damage a project and it takes more than two years to restart operation, banks may extend the grace period and capitalise interest. However, the borrower must first clear all overdue principal and interest.

Such loans will still be treated as restructured, but banks will need to maintain only 12.5 percent provisioning instead of 25 percent. This shows that NRB is adopting a differentiated approach between ordinary project delays and delays caused by extraordinary external events.

The amendment covers several priority sectors, including hydropower, energy-related projects, cement industries using domestic raw materials, pharmaceutical industries, cable car projects, sugar industries, dairy industries, medical colleges, tourist-standard hotels, hospitals, long-term fruit and herbal agriculture projects, and paper industries using domestic raw materials.

For these sectors, the policy could improve project bankability. Investors may find it easier to manage early-stage cash pressure if interest payments can be deferred until the project starts generating revenue.

However, the policy also carries risk. Capitalising interest increases the total loan burden. If the project later fails to produce expected income, both the borrower and the bank may face greater financial stress.

For this reason, the success of the policy will depend heavily on the quality of bank appraisal. Banks must carefully assess project viability, construction timeline, future cash flow, equity contribution and repayment capacity before allowing interest capitalisation.

The second major part of the amendment deals with financial crime control. NRB has directed banks and financial institutions to make arrangements for immediate account freezing and release in cases linked to financial crimes.

Under the new provision, if an investigating agency or law enforcement official makes a verbal or written request, banks must freeze accounts linked to financial crime for a short period without delay.

To implement this, banks must maintain a 24-hour operational mechanism. They must also publish a dedicated contact number on their websites so that investigation officials can contact them quickly.

This change reflects the growing risk of cyber fraud and digital financial crime. In digital fraud cases, money can move from one account to another within minutes. If banks act only during office hours or wait for lengthy written correspondence, suspicious funds may already be withdrawn or transferred.

The new arrangement is designed to reduce that delay. It allows banks to respond immediately when authorised officials request urgent action.

NRB has also directed banks to act on instructions received through its official online account-freeze system. If a bank delays or ignores such instructions, the concerned bank and responsible officials may be held accountable.

Banks must also report account-freezing and release details through the Supervisory Information System. This will help the regulator maintain a proper record of actions taken by banks.

The amendment also requires banks to provide account-related details promptly when requested by authorised investigating or law enforcement officials. This could speed up investigations into cyber fraud, illegal fund transfers, suspicious transactions and other financial crimes.

The overall policy message is balanced. NRB is trying to support productive and long-term investment by easing repayment pressure during the construction phase. At the same time, it is tightening supervision, provisioning and accountability to prevent misuse of regulatory flexibility.

For project developers, the amendment offers financial breathing space. For banks, it creates greater responsibility. For regulators, it provides clearer tools to monitor capitalised interest, restructured loans and emergency account-freeze actions.

The new arrangement therefore marks a two-sided regulatory shift. It supports long-term investment in infrastructure and productive sectors, but it also demands stronger risk discipline from banks and faster action against financial crime.